Social Performance Indicators
There has been a growing demand for transparency on the social performance of MFIs. However, indicators that measure social results have not been universally accepted despite microfinance’s double bottom line objectives, financial and social returns. Recently, controversies ranging from excessive profitability and usurious interest rates, to increasing client over-indebtedness and cases of client abuse have plagued the sector and called into question its social reputation. Claims that the social and development impact of microfinance may be overstated, or that it may actually be harming those it set out to help, have come to surface, forcing the industry to reevaluate itself and its social responsibility towards various stakeholders.
Initiatives such as the Social Performance Task Force (SPTF), MFTransparency, the Center for Financial Inclusion’s Smart Campaign on Client Protection Principles, along with social ratings of MFIs, have all contributed to increasing transparency and awareness of best practices.
There are many challenges in evaluating an MFI’s social performance. Not only do MFIs have a wide range of social missions and strategic objectives, but perspectives on what is “social” also vary considerably.
Some MFIs focus on serving women, the rural poor, or youth, while others want to increase access to financial services or offer non-financial services. There are situations where MFIs without an overtly social mission statement may achieve stronger social outcomes than those with very strong social missions. Understanding the contextual nuances is critical given the highly subjective nature of this aspect of microfinance. Measuring social performance is still in its infancy with few widely accepted quantitative indicators to capture the social results of an MFI’s operations.
In this blog we will look at National Loan Size Ratio and how it can contribute towards defining the social performance of the portfolio.
National Loan Size
This ratio provides a basic metric for comparing an MFI’s loan size across different geographies. The lower the percentage, the smaller the loan size is compared to the average wealth of a given country. It is not enough to simply compare average loan sizes for MFIs in India, Bosnia, and Peru and make an assumption on the MFI’s outreach. Contextualizing average loan size by GDP per capita is essential to adjust for varying levels of income between countries.
Loan sizes have been a proxy for gauging the MFI’s microcredit niche. Although this proxy has many limitations it continues to be widely used.
The smaller the loan size, the further “down market” and poorer the demographic niche; generally speaking, an NLR less than one indicates a focus on a lower microfinance niche. As the NLR approaches two, it is closer to a small business niche.
Portfolio Yield is strongly affected by competition and loan size. In markets where competition among MFIs is still low, Portfolio Yield tends to be high. MFIs can then charge what the market will bear, without having to worry about losing their clients to competitors. As competition develops, it can happen that Portfolio Yield drops from very high levels – 60%, 80% or more – to half those amounts or less within a few years.
Since GDP does not fluctuate dramatically year-over-year, a significant change in the ratio would imply a change in the average loan size, which should merit further investigation. Often changes in average loan size are affected by changes in the distribution of product within the portfolio. For example, a shift in focus from micro to SME lending.
The National Loan Size Ratio has no equivalent calculation in the traditional banking sector because unlike microfinance, social performance is typically not a business objective among commercial banks.
In the next blog we will look at Borrower Retention Ratio and how it impacts the social performance of a MFI.